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15 Aug 2005

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Against the yen, the $ renewed its downward trend early last week due to growing conf

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Last week, the $ regained against major currencies after US June capital flows data and strong US producer inflation index in July. The yen also drew support from optimism that Japanese Prime Minister Junichiro Koizumi would win an election on September 11 and drive economic reforms forward. Meanwhile, sterling edged up initially on the view that the Bank of England was unlikely to lower interest rates in the near future. Gold, on the other hand, gave up its gains later on the $'s rebound and weaker oil prices.

The $'s sentiment remained weak early last week due mainly to poor US trade data. The US trade deficit widened to $58.8 billion in June, the third largest on record, from $55.4 billion in May. The huge US trade deficit, a persistent pressure on the dollar over the past three years, had reemerged as a factor weighing more heavily on the US currency since China revalued its yuan currency in July. However, the $'s slide was cushion slightly by a report showing increased foreign demand for US assets in June. The United States attracted $71.2 billion worth of foreign capital in June, the largest net inflow since February and more than enough to cover its trade deficit. In order to fund the US trade deficit, dollars must flow into the United States in the form of portfolio inflows. If inflows are not large enough to offset the dollars going offshore to buy foreign goods, then the dollar will decline.

The $ pared its losses further as news of a sharp jump in US producer prices gave cover to traders looking to put short-term bets on the US currency. While inflation is normally considered negative for a currency because of the detrimental effects on economic growth, the data did little more than cement investors' expectations that the Federal Reserve will keep raising interest rates at a stead pace. The US producer price index rose 1% last month on soaring energy costs. In a sign of building inflation pressures, core PPI climbed 0.4%, against a 0.1% forecast. The inflation wary Fed has raised short term rates 10 times since June 2004.

Late in the week, the $ reached a two week high against the euro, helped by speculation that a report would show continued strength in US manufacturing. The Federal Reserve Bank of Philadelphia's index is one of the first gauges of manufacturing for August. The release was expected to show acceleration in activity, while its counterparts in Europe and Japan leave them unchanged.

Against the yen, the $ renewed its downward trend early last week due to growing confidence in Japan's economy, foreign buying of Tokyo stocks and the easing of concerns about September 11 snap election. Foreign investors bought Tokyo shares on the improving economic outlook, sending major indices to four-year peaks and driving the yen higher. But the $ edged up versus the yen later on news that the US producer inflation index rose 2.8% from a year earlier, its fastest pace since November 1995. The data reinforced views that the US central bank would keep raising borrowing costs.

The $ recovered to $1.2179 per euro and 110.51 yen on August 18, compared with $1.2369 per euro and 109.26 yen on August 15.

As for the UK currency, sterling firmed early last week after the Bank of England signaled that it was in no rush to cut interest rates. Besides, news that Australian investment bank Macquarie might team up with other investors to make a bid for the London Stock Exchange, with Sweden's OM Gruppen also reported to be mulling a move, was also seen an supportive for the pound. Also supporting the UK unit was a report that British house prices fell at their slowest pace in five months in July and minutes from the BOE that bankers split 5-4 on rate cut.

Late in the week, the pound remained strong versus the euro after British retail sales fell less than expected in July, but slid against a resurgent dollar. Sterling eased to $1.7951 on August 18 from $1.8112 on August 15.

On the bullion market, gold prices were well supported initially as a result of dollar weakness and high oil prices. Oil prices raced to record highs above $66 a barrel as investors fretted over the world's strained capacity to refine and pump crude oil. However, gold slipped gradually later on the $'s recovery and a steep drop in the crude oil prices. Gold can come under pressure when oil prices fall because investors have less interest in using the yellow metal as a hedge against inflation. Gold was traded around $441.70 and $442.40 an ounce on August 15 and 81, respectively, compared with $447 an ounce on August 12.


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